Scaling voluntary carbon markets

Introduction

The Institute for International Finance (IIF) has established a private-sector Taskforce on Scaling Voluntary Carbon Markets (Taskforce). The Taskforce brings together experts from across the carbon markets value-chain, from over 20 sectors of the economy and 6 continents.

Since forming, the Taskforce has been working on developing a roadmap to build the market infrastructure necessary for a fully functional voluntary carbon market. The proposed roadmap has been published in a Consultation Document (Consultation Document) and the recommendations in the Consultation Document are intended to outline the infrastructure solutions required to achieve the large-scale voluntary carbon markets which will be necessary for the private sector to achieve “net zero” targets.

The Taskforce’s work will complement other global private-sector taskforces that have been established to ease private-sector transition to a low-carbon economy while managing the associated financial risks.

One such private-sector taskforce is the Taskforce on Climate-related Financial Disclosures (TCFD).¹ The TCFD was established by the Financial Stability Board in 2015 and is made up of 32 members from private-sector organisations across G20 economies. The TCFD aims to identify the information needed by investors, lenders, and insurance underwriters to appropriately assess climate change, and price climate-related risks and opportunities. For more detail on the TCFD see our previous article which discusses the TCFD’s recommendations for effective disclosure.

Another noteworthy private-sector taskforce is the Taskforce on Nature-Related Financial Disclosure (TNFD) which is in the early stages of launch.² The TNFD recognises that global carbon emissions are not the only source of climate financial risks, and focusses on the relationship between finance, nature and biodiversity. The TNFD aims to redirect financial flows towards nature-positive investment, building economic resilience to future changes in the natural environment. At this stage the TNFD has established an Informal Working Group consisting of financial institutions, private firms, government bodies and think tanks. The TNFD’s scope, governance, plan and team will be announced in January 2021.

The Taskforce on Scaling Voluntary Carbon Markets

Voluntary carbon markets enable organisations to offset their emissions outside any mandated scheme. It is projected that there will need to be a 15-fold increase in demand for voluntary offsets by 2030 in order to support the investment necessary to achieve a 1.5ºC pathway.³ To assist with meeting this future demand, the Taskforce was launched in September by the IIF, a trade association for the global financial services industry. The Taskforce is led by voluntary carbon market stakeholders including suppliers and purchasers of offsets, and providers of market infrastructure.

The goal of the Taskforce is to deliver a ‘blueprint’ for the future of the voluntary carbon market, with a focus on scaling to meet growing demand. The Taskforce is guided by four key principles:

1. Producing open-source solutions for use by the private sector.
2. Voluntary carbon markets must have high environmental integrity and align to the ‘do no harm’ principle.
3. The work of the Taskforce will amplify existing and ongoing work of parallel initiatives.
4. Voluntary carbon markets must not disincentivise companies’ own emissions reduction efforts.

On November 10, 2020 the Taskforce published a Consultation Document which indicates what can be expected from the final ‘blueprint’.

Consultation Document

The Consultation Document highlights six topics for action:

1. Core carbon principles (CCPs)
   The Taskforce recommends the creation of a set of standards, named CCPs. The CCPs will set the threshold quality criteria for a verified carbon unit and the supporting standards and methodologies. Additional attributes can be attached to carbon units based on project type (i.e. avoidance, sequestration, removal) and cover matters such as vintage, co-benefits and location. This will allow buyers more specific product choice when selecting carbon units. By adhering to the CCPs, the Taskforce predicts credits will better standardised, thereby increasing buyer confidence.
   
   The CCP criteria will be determined by an independent third-party organisation, which will also be tasked with verifying projects against the CCPs.
   
   
2. Core carbon reference contracts
   The Taskforce recognises that there is a lack of “liquid” reference contracts in the current voluntary carbon market. The Taskforce recommends development of a standardised “liquid” contract, available for both spot and futures. In combination with a daily price signal for carbon, this is intended to improve management of price risk for carbon credits through more varied contracting options.
   
   The Taskforce recommends that futures contracts should be fungible across all market/trading platforms. To bolster flexibility, the Taskforce considers it is important to establish an active secondary market and create access to participants who have not traditionally been present in financial markets.
   
   
3. Improved infrastructure for trade, financing and data
   The Taskforce recommends that carbon project registries and data infrastructure should be improved, strengthening the integrity of the carbon market in preparation for higher volumes of trading.
   
   It is proposed that data infrastructure for carbon registries should be open through the use of Application Programming Interfaces. Additionally, “over-the-counter” carbon brokers that operate outside a formal exchange will be encouraged to provide transparent market data.
   
   It is also recognised that tailored structured finance solutions will be required in the short term, in order to support project development until a liquid spot and futures contracts market for carbon credits is established.
   
   
4. Consensus on the offset legitimacy
   The Taskforce acknowledges that a key problem facing the development of voluntary carbon markets arises from a lack of understanding of the role of offsetting in supporting the achievement of net zero goals. As per one of its guiding principles, it also notes that offsetting should not be considered as a substitute for direct emissions reductions by corporates.
   
   The Taskforce recommends two sets of principles for companies:
   
   a) Principles for net zero aligned corporate claims and use of offsets.
   
   b) Principles for credible use of offsets in products or at point of sale.
   
   It is intended that these principles will be managed by an independent body, and voluntarily followed by organisations.
   
   The Taskforce emphasises the role of climate organisations to provide guidance on, and the adoption of, uniform criteria, such as the Science Based Targets Initiative (SBTi).
   
   
5. Market integrity assurance
   The Taskforce calls for an independent organisation to oversee voluntary carbon market integrity. Areas to be addressed include project participant eligibility screening, and more accurate project validation and oversight. It is suggested that the verification process should be consistent across all markets where carbon credits are issued.
   
   It is proposed that projects can be better monitored through a digitised project cycle that captures project data, in addition to relying on satellite imaging and digital sensors.
   
   There is also a focus on preventing money-laundering in any stage of carbon projects. The Taskforce recommends that industry specific anti-money-laundering and know-your customer guidelines be developed.
   
   A number of new governance bodies are recommended along the supply, market intermediaries and demand chain to ensure both the integrity of carbon credits and the integrity of market participants and market functioning.
   
   
6. Demand signals
   The Taskforce emphasises that to drive supply, there needs to be clearer demand signals in the voluntary carbon market. To create steady long-term demand, the Taskforce recommends that offsetting advice from investor guidance groups, such as the Institutional Investors Group on Climate Change or Climate Action 100+, should be more consistent.
   
   It is also recommended that organisations enhance the options for consumers to purchase offsets, or allow consumers to opt for additional offset charges or micro-transactions. Further it is recognised that long-term industry commitments to offsets made publicly or through buyer commitments or pledges will improve demand signals.

Next steps

The consultation period for the Consultation Document runs from November 10 to December 10, 2020. Responses can be made through the Taskforce website. The final ‘blueprint’ containing targeted recommendations for different stakeholder groups is expected to be released in January 2021.

How can we assist you?

If you wish to discuss any aspect of this update or gain a greater appreciation of Australia’s carbon market, please contact a member of our climate change and sustainability team.

This article was co-authored with Sebastian Withers.